The House and Senate recently passed bills to reauthorize the
State Children's Health Insurance Program (SCHIP) that will soon be
reconciled in conference. Both bills rely on increasing the federal
tobacco tax-by 45 cents in the House bill and 61 cents in the
Senate bill-to fund SCHIP expansions. An increase in the federal
tobacco tax would cause states to lose tobacco tax revenue and
would also result in the majority of states losing out under the
redistribution of SCHIP expansion funds. Furthermore, the tax hike
would not provide enough revenue to fund proposed SCHIP expansions;
making up the difference would require millions of new smokers. As
the legislation moves to conference under the threat of veto by the
President, Members of Congress should consider the negative
consequences that SCHIP expansion would have on their states.
States Would Lose Revenues
When consumers purchase a pack of cigarettes, they pay both a
state and a federal tax. An increase in the federal tobacco tax
would cause the price of a pack of cigarettes to increase. Due to
sensitivity to increases in the prices of tobacco products (known
as "price elasticity"), the average consumer purchases fewer packs
when the price increases.
While the federal government would gain some additional revenue
from increasing the federal tobacco tax, state governments also
depend on tobacco tax revenue and would suffer financially. A hike
in the federal tobacco tax would lead consumers to purchase fewer
packs of cigarettes. The federal government would still gain
revenue because the tax increase, whether 45 cents or 61 cents, is
large enough to offset the decline in cigarette sales. State
governments, however, would lose out, taxing fewer packs of
cigarettes at the same state tax rate. Every state would collect
less tobacco revenue under an increased federal tobacco tax. (See
Under the House bill, every state would suffer a budget loss of
at least $1 million per year, and 17 states would have losses
greater than $10 million per year. Under the Senate bill, every
state would lose more than $1.4 million per year, and half of the
states would have budget losses of over $10 million per year.
California, Ohio, and Pennsylvania would lose over $50 million each
under the Senate bill.
With these enormous hits to their budgets, states would need to
reduce funding for programs, such as education or transportation,
or even eliminate some programs altogether. The Members of Congress
who advocate raising the tobacco tax for the SCHIP expansion should
be mindful of the consequences this tax increase would have on the
fiscal stability of their home states.
Redistribution Would Hurt Most States
Not all states would fare the same under either chamber's SCHIP
expansion plan. Under the Senate plan, 29 states would contribute
more in tobacco tax revenue than they would receive in SCHIP
expansion dollars. For instance, Florida would contribute
approximately 7 percent of the increased tax revenues but is
projected to receive only 5 percent of the federal allotment for
SCHIP funding. Consequently, Florida would suffer a net loss of
over $700 million over 5 years. In all, 29 states would wind up
losers, 16 states would wind up winners, and 5 states would neither
gain nor lose much. (See Map 1.)
An Unreliable Funding Source
Congress's choice of a tobacco tax hike to fund SCHIP expansion
might make political sense, but a higher tobacco tax would not be a
reliable or sufficient funding source. Already, tobacco tax
revenues are in decline as the population of smokers continues to
decrease, and the decline in sales of tobacco products would
accelerate with a higher tobacco tax. Thus, the additional revenue
generated from increased tobacco tax would decrease over time.
Due to this effect, policymakers will somehow need to recruit
new smokers if they insist on using the tobacco tax revenue to
support SCHIP at proposed funding levels over the long term. In
just five years, Congress will need over 9 million new smokers.
Reauthorizing the program for 2013 to 2017 would require almost
22.4 million new smokers by the end of that period. To pay for SCHIP, Florida, Texas, and
California would have to add about 1.5 million new smokers each by
2017, and other states would have to add smaller numbers. (See
Table 2.) While unrealistic, this scenario is apparently what
Congress envisions in its SCHIP proposals.
Recommendations for Congress
Congress should consider the unintended effects of SCHIP
expansion. Worse than its impact on state budgets, SCHIP expansion
would increase dependence on government health care, displace
private insurance coverage, and increase government spending. Rather
than expand SCHIP, Congress should reauthorize SCHIP so that
- Focuses on low-income children. The current bills in
Congress allow states to expand eligibility beyond low-income
families, the vast majority of whom already have private coverage.
Expanding eligibility to children in families with higher income
only causes those families to drop private insurance in favor of
government-run, taxpayer-funded health care. A more efficient use
of SCHIP funds would be to focus only on children in low-income
families, prioritizing those most in need.
- Augments private coverage. Instead of expanding a
government program, Congress should make private coverage a more
affordable option for low-income families. One way to do this
within the original scope of SCHIP is through premium assistance,
which essentially allows eligible families to use SCHIP funds to
subsidize the purchase of health care for their children.
Congress should facilitate states' use of premium assistance by
removing burdensome administrative procedures.
- Is fiscally sustainable. Current bills in Congress
carelessly use the tobacco tax-a declining source of revenue-as the
basis for their SCHIP expansion. Moreover, the House bill does not
place a cap on SCHIP allotments, thereby creating another
open-ended entitlement. Instead, Congress should follow a fiscally
responsible approach, focusing only on low-income children and
obligating states to operate their programs within their SCHIP
With a presidential veto likely, the House and the Senate will
have the opportunity to revise their respective bills and
reauthorize SCHIP as a program that does not harm states but helps
them to offer health insurance to children in low-income families
in an affordable and efficient manner.
Greg D'Angelo is Research Assistant, and Michelle C. Bucci
is Health Policy Fellow, in the Center for Health Policy Studies at
The Heritage Foundation. Marcus Newland is an intern in the Center
for Data Analysis at The Heritage Foundation.
thorough discussions of the House and Senate bills, see Cheryl
Smith and Robert E. Moffit, "The House SCHIP Bill: Cutting
Medicare, Undercutting Private Coverage, and Expanding Dependency,"
Heritage Foundation WebMemo No. 1580, August 1, 2007, at
and Nina Owcharenko and Robert E. Moffit, "Redesigning SCHIP to
Strengthen Private Heath Insurance for Working Families," Heritage
Foundation WebMemo No. 1564, July 23, 2007, at www.heritage.org/static/reportimages/98E919B9D32B946729993F725BE3F41A.pdf.